Despite the advance tax outflows sucking out about Rs 30,000 crore from the banking system and banks rushing to expand their year-end credit offtake, liquidity remains stable in the system indicating to soften bond yields soon.
Market participants say that there is surplus liquidity in the system.
“We expect the 8.24% bond to stabilise at 6.25% by March end and the 6.05% bond to stabilise at 6%. This is just a temporary phase. We expect yields to ease, as interest rates are on the decline,” noted NS Venkatesh, MD&CEO with IDBI Gilts.
Banks have parked a net of Rs 20,190 crore on Wednesday, as against Rs 16,015 crore on Tuesday, with the Reserve Bank of India (RBI) through the reverse repo window.
On Monday, banks parked Rs 22,755 crore at RBI’s twin reverse repo tenders compared to Rs 50,495 crore on Friday.
On Wednesday, call rates ended marginally up as advance tax outflows put pressure on banks that were in a rush to meet reserve requirements in the first week of the reporting cycle. It ended at 4.25/40%, above its previous close of 4.20/30%. However, dealers noted that this was just a temporary phase.
“By the end of March, government spending should happen, which should help call rates ease. This is just a temporary phase. Liquidity is surplus in the system and as such there is no pressure on funds,” said a dealer at a public sector bank.
“With interest rates heading southwards, banks have started parking less with the central bank,” said Venkatesh. He noted that on Wednesday the remaining part of advance tax outflows (30%) would flow out of the system. “However, liquidity still remains abundant,” he said. According to data from the Clearing Corporation of India (CCIL), volume in the call money market stood at Rs 15,737 crore as against Rs 17,757 crore on Tuesday. Meanwhile, talking about the bond market, supply worries are creeping in.
On Wednesday, the yield on the 8.24% bond maturing in 2018 ended at 6.67%, lower than Tuesday’s close of 6.71%. The yield on the 6.05% bond due 2019 was down to 6.44% as against Tuesday’s close of 6.50%.
Volumes were low at Rs 3,540 crore as against Rs 2,985 crore, on Tuesday, with the 2019 bond being most traded.
“Market players are waiting for a signal from the government on the borrowing programme and also on the interest rate scenario. Hence, market volumes are trading low,” noted Golak C Nath, vice-president & economic advisor with CCIL.
The country is looking at selling Rs 2.61 lakh crore of bonds in the year ending March 31, higher than the previous fiscal, in a bid to fund the economic slump. The debt sale target for next year is Rs 3.62 lakh crore.
On Monday, the central bank purchased Rs 8,040 crore of the 2018 notes out of the planned Rs 10,000 crore. There would be another open market operation (OMO) on Thursday for Rs 10,000 crore. The central bank is yet to announce how it will raise Rs 12,000 crore before the fiscal year ends on March 31 after it cancelled an auction last week. On March 20, the central bank would sell Rs 6,000 crore of 6.05% bonds maturing in 2019 and Rs 4,000 crore of 6.72% bonds maturing in 2014.
